Systems and methods for market order volume clearing in online trading of credit derivatives

ABSTRACT

Systems and methods for market order volume clearing in online trading of credit derivatives are disclosed. In one embodiment, a method for market order volume clearing may comprise: selecting, from a plurality of credit derivatives, at least one most liquid credit derivative; determining a volume clearing price level for the selected credit derivative; inviting trading clients of the electronic trading system to submit, within a time limit, buy orders and sell orders for the selected credit derivative at the volume clearing price level, each buy order or sell order specifying a desired volume; matching the buy orders and the sell orders submitted within the time limit to maximize a total notional amount of the selected credit derivative that can be traded at the volume clearing price level; and completing trades at the volume clearing price level according to the matching of orders.

CROSS REFERENCE TO RELATED APPLICATIONS

This patent application is a divisional of U.S. patent application Ser.No. 12/197,395 filed Aug. 25, 2008, which claims priority to U.S.Provisional Application No. 60/988,009, filed Nov. 14, 2007, and U.S.Provisional Application No. 60/957,823, filed Aug. 24, 2007, and is alsoa continuation-in part of U.S. patent application Ser. No. 10/954,629,filed Sep. 29, 2004, U.S. patent application Ser. No. 10/957,217, filedOct. 1, 2004, and U.S. patent application Ser. No. 11/837,159, filedAug. 10, 2007, which are continuation-in-part applications of U.S.patent application Ser. No. 10/316,167, filed Dec. 9, 2002.

Each of the aforementioned related applications is hereby incorporatedby reference herein in its entirety.

FIELD OF THE INVENTION

Embodiments of the present invention relate generally to online tradingof financial instruments. More specifically, the present inventionrelates to systems and methods for volume clearing during online tradingof credit derivatives.

BACKGROUND OF THE INVENTION

The related applications have disclosed an online trading system thatbrings significant improvements over the inefficient dealer-brokerparadigm of convention credit derivative market. With an electronictrading platform and a suite of online and offline features, a largenumber of dealers or trading clients may trade credit derivatives in astreamlined fashion, that is, without the prior limitations ofregionalized markets, lack of standardized documentation, slowdissemination of pricing information.

On a high enough level, electronic trading of credit derivatives issimilar to electronic trading of stocks or other exchange-tradedfinancial instruments in that a central computer or electronic systemtypically facilitates trades among remotely situated traders. However,the similarity does not go much beyond that.

Credit derivatives, such as credit default products, are typicallyover-the-counter (OTC) contracts negotiated and entered into by dealerson behalf of relatively large institutions. For example, a creditderivative by definition must reference a third party upon whosecreditworthiness the price and value of the credit derivative is based.Therefore, before it can be traded electronically, each creditderivative position must be defined in much greater detail than publicstocks. Credit derivatives are also fairly illiquid, unlike publicstocks which are more like fungible commodities.

The credit derivative market is also unique in many different ways.Traditionally, the credit derivative market has not been as wellorganized or regulated as stock exchanges or bond markets. The user base(or the number of potential counterparties) of credit derivative marketis much smaller than that of public stocks. There is a need to increasethe number of trades of credit derivatives. At the same time, there hasbeen concerns that large trades or even a perceived desire for largetrades may artificially influence pricing levels in the relatively smallcredit derivative market.

In view of the foregoing, it may be understood that there aresignificant problems and shortcomings associated with current creditderivative trading techniques.

SUMMARY OF THE INVENTION

Systems and methods for volume clearing during online trading of creditderivatives are disclosed. In one particular exemplary embodiment, acomputer-implemented method for volume clearing in an online tradingsystem of credit derivatives may comprise: selecting, from a pluralityof credit derivatives, at least one most liquid credit derivative thathas either been traded or seen trading interest in the online tradingsystem during a predetermined time period; determining a volume clearingprice level for the at least one most liquid credit derivative based on:an availability of a last bid, a last offer, or a last trade associatedwith the at least one most liquid credit derivative, a timingrelationship among the last bid, the last offer, and the last trade, ifavailable, and price levels of the last bid, the last offer, and thelast trade, if available; inviting trading clients of the electronictrading system to submit, within a lime limit, buy orders and sellorders for the at least one most liquid credit derivative at the volumeclearing price level, each buy order or sell order specifying a desiredvolume; matching the buy orders and the sell orders submitted within thetime limit to maximize a total notional amount of the at least one mostliquid credit derivative that can be traded at the volume clearing pricelevel; and completing trades at the volume clearing price level,according to the matching of the buy orders and the sell orders.

In another particular exemplary embodiment, an electronic trading systemof credit derivatives may comprise: a processor; at least one storagedevice coupled to the processor; a user interface coupled to theprocessor via one or more communication networks; wherein the processoris adapted to communicate with the at least one storage device and theuser interface to execute instructions to perform the following tasks:selecting, from a plurality of credit derivatives, at least one mostliquid credit derivative that has either been traded or seen tradinginterest in the electronic trading system during a predetermined timeperiod; determining a volume clearing price level for the at least onemost liquid credit derivative based on: an availability of a last bid, alast offer, or a last trade associated with the at least one most liquidcredit derivative, a timing relationship among the last bid, the lastoffer, and the last trade, if available, and price levels of the lastbid, the last offer, and the last trade, if available; inviting tradingclients of the electronic trading system to submit, within a lime limit,buy orders and sell orders for the at least one most liquid creditderivative at the volume clearing price level, each buy order or sellorder specifying a desired volume; matching the buy orders and the sellorders submitted within the lime limit to maximize a total notionalamount of the at least one most liquid credit derivative that can betraded at the volume clearing price level; and completing trades at thevolume clearing price level according to the matching of the buy ordersand the sell orders.

The present invention will now be described in more detail withreference to exemplary embodiments thereof as shown in the accompanyingdrawings. While the present invention is described below with referenceto exemplary embodiments, it should be understood that the presentinvention is not limited thereto. Those of ordinary skill in the arthaving access to the teachings herein will recognize additionalimplementations, modifications, and embodiments, as well as other fieldsof use, which are within the scope of the present invention as describedherein, and with respect to which the present invention may be ofsignificant utility.

BRIEF DESCRIPTION OF THE DRAWINGS

In order to facilitate a fuller understanding of the present invention,reference is now made to the accompanying drawings, in which likeelements are referenced with like numerals. These drawings should not beconstrued as limiting the present invention, but are intended to beexemplary only.

FIG. 1 is a diagram illustrating an exemplary credit derivative tradingsystem in accordance with one embodiment of the present invention.

FIG. 2 is a flow chart illustrating an exemplary method of facilitatinga transaction within the system of FIG. 1 in accordance with oneembodiment of the present invention.

FIG. 3 is a screen shot illustrating an example method of displaying arequest to upsize a trade in accordance with one embodiment of thepresent invention.

FIG. 4 is a screenshot illustrating an exemplary method for displayingtrade information that includes an option for volume clearing inaccordance with one embodiment of the present invention.

FIG. 5 is an exemplary screen shot of a display that can be used toimplement volume clearing in accordance with one embodiment of thepresent invention.

FIG. 6 is a chart that illustrates one example of the matching of ordersreceived in a volume clearing session.

FIG. 7 is a flow chart depicting an exemplary method of determining avolume clearing price level based on bids and offers submitted byparticipants.

FIG. 8 shows two tables illustrating an exemplary method of determininga volume clearing price level in accordance with one embodiment of thepresent invention.

FIG. 9A is an exemplary screen shot illustrating how a participant maybe solicited for bids and offers in accordance with one embodiment ofthe present invention.

FIG. 9B is an exemplary screen shot illustrating how a participant mayperform volume clearing in accordance with one embodiment of the presentinvention.

FIG. 9C is an exemplary screen shot illustrating the results of a volumeclearing session in accordance with one embodiment of the presentinvention.

FIG. 10 is a flow chart illustrating an exemplary method for performinga market order volume clearing in accordance with one embodiment of thepresent invention.

FIG. 11 is an exemplary decision tree for determining a volume clearingprice level for a market order volume clearing session in accordancewith one embodiment of the present invention.

FIG. 11A shows a table listing exemplary price scenarios and theresultant volume clearing price levels in accordance with one embodimentof the present invention.

FIG. 11B shows a table presenting exemplary trading data related to realmarket order volume clearing sessions.

FIG. 12 is an exemplary decision tree for determining a volume clearingprice level in certain scenarios in accordance with one embodiment ofthe present invention.

FIG. 13 is a screen shot showing an exemplary market order volumeclearing control window in accordance with one embodiment of the presentinvention.

FIG. 14 is a screen shot showing an exemplary display of Top-5 singlenames in accordance with one embodiment of the present invention.

FIG. 15 is a screen shot showing an exemplary volume clearing window atrade client may see during a market order volume clearing session inaccordance with one embodiment of the present invention.

FIG. 16 is a flow chart illustrating an exemplary method of limit ordervolume clearing in accordance with one embodiment of the presentinvention.

FIG. 17 is an exemplary decision tree for determining an auction pricefor limit order volume clearing in accordance with one embodiment of thepresent invention.

FIG. 18 is a screen shot showing an exemplary volume clearing window atrade client may see during the order submission phase of a limit ordervolume clearing session.

FIG. 19 is a screen shot showing an exemplary volume clearing window atrade client may sec during the volume clearing phase of a limit ordervolume clearing session.

FIGS. 20-25 show numerical examples of six scenarios referenced in theexemplary decision tree of FIG. 17.

FIGS. 26A-C show a numerical example for determining an auction price inaccordance with one embodiment of the present invention.

DETAILED DESCRIPTION OF THE INVENTION

Embodiments of the present invention provide for an online tradingsystem for financial instruments and particular functionalities forelectronic trading of credit derivatives. Preferred embodiments of thepresent invention further facilitate creative trading techniques such asvolume upsizing, volume clearing based on recent trades, volume clearingbased on tradable credit spread fixings, market order volume clearing,and limit order volume clearing.

Credit Derivative Trading System

FIG. 1 is a diagram illustrating an example credit derivative tradingsystem 100 in accordance with one embodiment of the systems and methodsdescribed herein. System 100 may comprise a credit derivative authority102 interfaced with a database 104. Database 104 may, as illustrated,actually comprise one or more databases depending on the embodiment. Thecredit derivative authority 102 may also be interfaced with a pluralityof trader clients via terminals 108 through a network 106.

In one embodiment, the network 106 may be the Internet, although thenetwork 106 may be any type of wired or wireless Wide Area Network(WAN), wired or wireless Local Area Network (LAN), or even a wired orwireless Personal Area Network, or some combination thereof. In certainembodiments, the credit derivative authority 102 and/or the terminals108 may be interfaced with the network 106 via wired and/or wirelesscommunication links.

In one embodiment, the terminals 108 are computer terminals, such asdesktop or laptop computers. In other embodiments, terminals 108 arehandheld devices, such as handheld computers or personal digitalassistants (PDAs). It will be apparent, however, that terminals 108 canbe any type of terminal configured to include the functionality requiredby the systems and methods described herein.

The term “authority” used to identify the credit derivative authority102 is intended to indicate that the terminals 108 communicate with thecredit derivative authority 102 through the computing systems, hardwareand software, associated with the credit derivative authority 102.Depending on the embodiment the term “authority” may refer to one ormore servers, such as Internet or web servers, file servers, and/ordatabase servers, one or more routers, one or more databases, one ormore software applications, one or more Application Program Interfaces(APIs), or some combination thereof. Further, the computing systemassociated with the credit derivative authority 102 may include one ormore computers or computer terminals. To that extent, some of the samecomponents that comprise the computer system associated with the creditderivative authority 102 can also include the terminals 108.

System 100 may include a standardize interface that allows traderclients to define positions with the credit derivative authority 102 forany of a plurality of credit derivatives regardless of the region,industry, etc. The credit derivative authority 102 is configured to thenstore the positions in the database 104. Using the standardizedinterface, the credit derivative authority 102 may display informationrelated to the positions stored in the database 104 to the traderclients via the terminals 108. The trader clients are then able todefine responsive positions, indicate a willingness to transact, and/orcomplete a transaction through the standardized interface. Thus, thecredit derivative authority 102 can replace the dealer-broker paradigmof conventional credit derivative markets and provides the traderclients with more outlets, greater liquidity, and more efficiency, allof which can help lower transactional costs.

The standardized interface may comprise software components configuredto run on or to interoperate with the credit derivative authority 102 aswell as client software components configured to run on the terminals108. Thus, the credit derivative authority 102 can work in conjunctionwith the client software running on the terminals 108 to format anddisplay information to the trader clients in a uniform manner and toreceive input from the trader clients through terminals 108 in a mannerthat allows quick, easy, and efficient transactions. Certain featuresand aspects of the standardized interface are discussed more fullybelow.

FIG. 2 is a flow chart illustrating an exemplary process forfacilitating a transaction within System 100 or a similar online tradingsystem. The process begins in step 402 with a trader client indicating adesire to transact, for example, in response to an updated positionreceived from the system 100. For instance, the trader client may useits standardized interface to indicate a desire to transact. In oneembodiment, when the credit derivative authority 102 receives theindication, it may determine the ability of the trader client totransact on the associated credit derivative. Thus, in step 404, thecredit derivative authority 102 determines, based on information storedin the database 104, whether the trader client indicating a desire totransact is acceptable to the other party.

Since the credit derivative market is a bilateral market, certain traderclients may not wish to deal with certain other trader clients in all,or some, situations. Thus, in certain embodiments, the credit derivativeauthority 102 may be configured to receive information identifyingtraders with whom the trader client defining a new position is willingor unwilling to transact. That is, the trader client may provideidentifying information to the credit derivative authority 102 thatincludes and/or excludes certain traders as potential counterparties.Depending on the embodiment, the identifying information may include thenames of certain trader clients or define characteristics of acceptable(or unacceptable) trader clients.

In one embodiment, if the credit derivative authority determines thatthe trader client is not acceptable to the other party, then, in step406, the credit derivative authority 102 may present the other partywith the option to proceed. If the other party declines, then thetransaction is not consummated. If, on the other hand, the other partyis willing to continue, or if it is otherwise determined in step 404that the trader client is able to transact, then the transaction mayproceed.

The trader client may indicate a willingness to transact in step 402 byindicating a willingness to accept the terms associated with the newposition or by indicating a willingness to negotiate with the otherparty. If the indication in step 402 is an acceptance, then the otherparty may be notified, in step 408, of the acceptance by the creditderivative authority 102. If the indication in step 402 is of awillingness to negotiate, then the parties may negotiate with each otherin step 410. As will be described in more detail below, the negotiationis preferably aided by the standardized interface and the creditderivative authority 102 of System 100. In an alternative embodiment,once the trader client indicates a willingness to transact in step 402,the trader client may call, or may be contacted by, a broker associatedwith the credit derivative authority 102 to negotiate and reach anagreement on the transaction. In certain embodiments, direct negotiationas just described is not supported.

Once an agreement is reached regarding the transaction, the trade may bedeemed completed. Then, in step 412, all of the information associatedwith the transaction may be stored by the credit derivative authority102 into the database 104 in real-time or substantial real-time. Thatis, the information may be stored while it passes back and forth betweenthe parties and between the parties and credit derivative authority 102.The credit derivative authority 102 may then update the informationdisplayed to the trader clients, again in substantial real-time, in step414, based on the transaction information.

Volume Upsizing

In another embodiment, upon the settlement or completion of thetransaction, the credit derivative authority 102 may prompt the traderclient and/or the other party whether they desire to upsize the trade,that is, to increase the notional amount of the trade just completed. Atthis point, both parties to the trade may be given a chance to request atrade of a larger notional amount, before knowing who their tradingpartner is. Upon determination of the largest notional amount agreedupon by both parties (anonymously), the notional amount of the trade maybe accordingly increased in step 416, and the trade may be completed atthis increased (or “upsized”) notional amount.

The volume upsizing option may be beneficial when a trader clientdesires to trade a notional amount that is greater than the standard ordefault amount. Generally, traders are hesitant to make an intention totrade more than the standard or default amount known, because this canresult in a lower price for the credit derivative or otherwise skew thepricing thereof. Thus, if a default trade amount is 10 million sharesand a trader desires to trade 30 million shares, the trader will oftensimply attempt to make three trades. With the volume upsizing processdescribed herein, a trader desiring to trade a large notional amount ofa credit derivative can trade that notional amount without making themarket aware of his intention, thereby maintaining the value of hiscredit derivative.

FIG. 3 is a screen shot illustrating an exemplary method of displaying arequest upsize a trade in accordance with an embodiment of the presentinvention. Field 802 indicates that the original trade is completed inthe notional amount shown in Field 806. In this particular embodiment,the trader client is given a predetermined amount of time to respond tothe upsize prompt, which is 20 seconds as shown in Field 804. The traderclient may then elect to increase the trade to a higher notional amountby activating Buttons 810, 812, or 814 depending on the desired size ofthe increase, or the trader client may indicate no desire to increase byactivating Button 808. If both parties agree, the trade may be upsizedto the notional amount selected. In another embodiment, the upsizeprompt may repeal until one of the two trading parties no longer wishesto upsize, at which point the largest amount agreed upon by both partiescan be traded. In yet another embodiment, if the two parties both chooseto upsize but not to the same notional amount, the smaller of the twonotional amounts selected may be taken as the agreed-upon notionalamount.

Volume Clearing Based on Recent Trade(s)

While the volume upsizing option has been described thus far as beinglimited to counterparties of a completed trade, such limitation may berelaxed or removed. Through a process generally referred to as “volumeclearing,” an online trading system may cause a plurality of traderclients to anonymously trade a financial instrument (e.g. creditderivative) at a predetermined price level and within a defined timewindow.

For example, when there is sufficient activity in a particular creditderivative as determined either by the trading system or by theparticipants, the trading system may facilitate a volume clearing ofthat credit derivative based on its most recently traded price. Inoverview, once the credit derivative has been traded, trader clients(including but not limited to the original counterparties in thecompleted trade) may be invited to make bids and/or offers on thatcredit derivative during a set time interval. Those who desire toparticipate indicate the notional amount they desire to buy or sell.Once the time limit expires, the trading system determines whichparticipants can trade and which buyers actually trade with whichsellers, by matching similar trade amounts.

More specifically, when a trade is completed, the price can be offeredto invited participants by listing the trade in a “Volume Clearing”display. FIG. 4 is a screen shot of an example of a Volume Clearingdisplay showing credit derivatives that a participant can trade. Column902 represents credit derivatives that are available to be traded andthe corresponding prices. Column 904 shows the time remaining to tradethat particular credit derivative at that price level. For example, inthe first row, the credit derivative Commerzbank (CMZB) is available fortrading at a price of 19 basis points (bps) for the next 18 seconds.Participants are invited based on criteria which is indicative of theirdesire to trade that credit derivative, such as placement of a bid inthe current trade session or placement of a bid in a recent tradesession involving the trade derivative.

FIG. 5 is an exemplary screenshot to illustrate a method by which aninterested participant can participate in volume clearing. Field 1002shows the credit derivative and the price it is being traded at. Theparticipant can select Button 1004 and enter a notional amount intoField 1006 that he desires to buy the credit derivative, or,alternatively, the participant can select Button 1008 and enter anotional amount into Field 1010 that he desires to sell. The order isthen placed by clicking on Field 1012. The volume clearing or volumematching window shown in FIG. 5 may be a pop-out window that only appearfor a predetermined time period and may display a count-down clock toremind the user how much time is left to place an order. Alternatively,the volume matching window may be a part of a larger spreadsheet ortrading screen that can be highlighted, flashing, displaying othervisual alerts, or generating audio alerts during an ongoing volumeclearing session.

After the set time interval has expired, the orders can be filledaccording to the priority of the participant. The participant can beassigned a priority in the following order: (a) the highest prioritygoes to participants in the recent trade whose trading price has beenadopted for the volume clearing session: (b) the next highest prioritygoes to participants who are in the buyer or seller priority queues atthe time of that recent trade: and (3) finally, the remainingparticipants are prioritized on a first come first serve basis.

The orders are then matched to optimize as much as possible orders ofthe same size of the counterparties. By doing so, the number of tradetickets generated is minimized. Once the matching is completed a tradeticket is generated and each transaction can be completed similar to themanner described above for a single trade.

FIG. 6 is a table showing an example of how trade matching works in avolume clearing session. In table 1102, there are shown four buyers andthree sellers with their respective orders listed in the order of theirpriority. In matching table 1104, Buyer 1 is matched with Seller 3because their notional amounts match. Furthermore, Buyer 2 is matchedwith Seller 1 because their notional amounts match. Since the remainingorders do not match exactly, the orders can be split. Buyer 3 havingpriority over Buyer 4 is matched first with Seller 2. Since Seller 2′sorder is larger than Buyer 3′s order, the remaining notional amount ofSeller 2′s order is available to Buyer 4.

Another method of assigning priority to traders during a volume clearingsession is to assign the highest priority to the original buyer andoriginal seller, to assign the next highest priority to the originalbuyer and original seller if they change sides (e.g., I bought on theoriginal trade that caused a volume clearing to occur, and I now wish tosell during the volume clearing session), and to assign the next highestpriority based on the rankings of the participants price support and/ordepth.

Price support can be calculated as follows. (1) fake the sum of allvalid price support hours for each participant, for example, in the last30 trading days. Valid price support hours is the number of hours forwhich prices are displayed on the electronic trading platform. Pricesare considered valid if a bid is within a pre-determined threshold ofthe best offer of the day, and if an offer is within a pre-determinedthreshold of the best bid of the day. (2) Rank all participants frombest to worst. (3) Assign numerical scores to the ranked participants,for example, score the best as 1, second best as 2, and continue untilall participants have been assigned a score.

Depth is an indication of whether a participant had a price in theoriginal buyer or seller's priority queues during the original (recent)trade as well as the participant's position in the queue(s). Forexample, if the credit derivative traded at 20 bps prior to the volumeclearing session, and the participant was in the queue with thenext-best bid of 19 bps, the participant may be given an appropriatepriority in the volume clearing based on his position in the queue.

A priority can be based on either price support ranking or depthranking. Alternatively, a priority can be based on both price supportand depth rankings, for example, 50% on price support and 50% on depth.

Priority can also be assigned according to yet another methodology,which benefits participants that may trade a lot but may not get creditfor as much price support under the previously described mythology.According to this methodology, the highest priority goes to the originalbuyer and original seller, the next highest priority is assigned to theoriginal buyer and original seller if they change sides during thevolume clearing, the next priority is then assigned based on theparticipants ranking based on the rankings of the participants' notionalamount and/or price support.

The ranking of notional amount can be calculated by summing the numberof trades of a standard size in a given sector for the last 30 calendardays. More specifically, the calculation can be based on the number of“clips” of market standard size that have been traded. Market standardsize is defined by the system and is the most common size that peoplewill post prices onto the trading platform.

Examples of standard market sizes may include for example:

iTraxx Europe & HiVol EUR 25 MM iTraxx Crossover EUR 10 MM EuropeanFinancials EUR 10 MM European Single Names EUR 5 MM

For example, if a participant trades 500 MM iTraxx Europe and 80 MMiTraxx Crossover in the last 30 days, both trades would count towardsthe ranking for European Indices for volume clearing purposes. However,the data may be normalized before being counted (otherwise there is anincentive advantage towards trading iTraxx Europe instead of iTraxxCrossover as far as the ranking calculation is concerned). The notionalamount of each trade may preferably be divided by the correspondingstandard market size. For Example: 500 MM/25 MM=20 clips of iTraxxEurope, 80 MM/10 MM=8 clips of iTraxx Crossover.

Therefore, the platform counts (20+8=28) clips of standard market sizetraded for this participant. This calculation may be performed for allthe counterparties, and then counterparties may be ranked according tothe calculated results.

According to some embodiments of the present invention, large-magnitudetrades can be rewarded with a higher value counted towards the notionalamount ranking than other trades. For example, any tickets that aregreater than or equal to four times Market Standard Size (e.g., FUR 20MM on European single names and EUR 100 MM on iTraxx Europe) can countdouble. In the previous example of trading 500 MM Europe, if aparticipant executed one trade of 100 MM on the trading platform duringthis period, the calculation may be as follows: 400 MM/25 Mis.4=16 clipsof regular-sized iTraxx Europe trades, 100 MM.times.2/25 MM=8 clips oflarge-magnitude of iTraxx Europe trades, and 80 MM/10 MM=8 clips ofiTraxx Crossover trades. Therefore the system will count 32 clips ofstandard market size traded for this participant.

Indices, for example European indices have many different (old) seriesthat may not be current. iTraxx Europe, for example, has 5 series (orversions) available. Preferably, the notional ranking calculation isbifurcated into one ranking for the current series (series 5 in Europe)and another ranking across all other series (i.e., sum of notionaltraded across all the other four series).

The price support ranking docs not change from the previously describedmethodology based on price support and depth. To obtain an overallranking, the notional and price support rankings for each participantmay be averaged. The participants are then re-ranked according to theaveraged rankings. Any ties can be broken by looking first at thenotional ranks and then the price support ranks of participants who havethe same averaged ranking. For example:

Notional Price Support Overall (averaged) Bank A 5 7 6 Bank B 7 5 6

In the above example both banks have an overall rank of 6. In the finalcalculation Bank A can be ranked 6 and Bank B ranked 7 because Bank Ahas a higher ranking in its notional amount.

Volume Clearing Based on Tradable Credit Spread Fixing

According to some embodiments of the present invention, a price may befixed by an online trading system for a credit derivative (or otherfinancial instrument), and then invited participants may place orders(e.g., by specifying desired volumes) to buy or sell the creditderivative at the fixed price. A volume clearing or volume matchingprocess as described herein may be employed to match up the orders andcomplete the resultant transactions. There are many methods by which thetrading system may fix a volume clearing price. For example, the systemmay solicit and accept a number of bids and offers from itsparticipants. Each of these bids and offers may include, in addition toa bid price (if buying) or an offer price (if selling), a desired volumeto be traded. In one embodiment, the bids and offers may be made bindingto prevent participants from entering false bids in order to influencethe market. Furthermore, to prevent participants from unduly influencingthe market, a participant whose bid price is met, that is the bid priceis at least that of the fixed price can be prohibited from sellingduring the volume clearing. Likewise, a participant whose offer price ismet, that is the offer price is at most that of the fixed price can beprohibited from buying during the volume clearing. Based on these bidsand offers the system can select or determine a fixed price for a volumeclearing session.

FIG. 7 is a flow chart depicting an exemplary method of determining avolume clearing price level based on bids and offers submitted byparticipants. In step 1302, the system solicits bids and offers from theparticipants. The bids and offers may be solicited from a group of tradeclients, typically market-making dealers. Bach dealer may be required tosubmit a binding two-way market including both a bid price and an offerprice. In step 1304, the system wails a predetermined period of lime. Instep 1306, the system collects all valid bids and offers from theparticipants. In step 1308, the bids are sorted into a first sequencewith the highest bids first (i.e., in descending order), and,separately, the offers are sorted into a second sequence with the lowestoffers first (i.e., in ascending order). In step 1310, all bids exceptfor a first predetermined number or portion of the highest bids and alloffers except for a second predetermined number or portion of the lowestoffers are discarded. For example, according to one embodiment, thelowest half of the bids and the highest half of the offers may bediscarded. That is, only the highest half of the bids and the lowesthalf of the offers are kept. This filtering step (1310) may be helpfulto exclude outlier orders and/or those orders that were intended tounduly influence to the market. In step 1312, the average is computed byaveraging all the bid prices and offer prices of the remaining orders.In some embodiments where a volume is specified along with a bid and/oroffer price, the average may be computed as either a simple averagewhere each bid price and offer price is accounted for equally or as aweighted average where each bid price and offer price is averaged basedon a corresponding volume specified by the participant. This average iscalled the mid fixing. In step 1314, a sequence of markets is created bypairing the sorted sequence of bids with the sorted sequence of offers,so that the highest bid and the lowest offer comprise a first market inthe sequence, wherein each market comprises a bid and an offer. In step1316, a determination is made as to whether the highest bid exceeds thelowest offer. If not, the volume clearing price is fixed at the average(i.e., mid fixing or “mid”) in step 1318. If so, the market (i.e. pairof bid and offer) with the lowest bid and the highest offer where thebid is at least the offer is determined. This market is referred to asthe “last tradable market.” In step 1322, a determination is made as towhether the average (or mid) is above the bid of the last tradablemarket, below the offer of the last tradable market, or between the bidand the offer of the last tradable market. If the average is between theoffer and the bid of the last tradable market, then the volume clearingprice is fixed at the average in step 1318. If the average is above thebid of the last tradable market, then the volume clearing price is fixedat the bid price of the last tradable market in step 1324. If theaverage is below the offer of the last tradable market, then the volumeclearing price fixed at the offer price of the last tradable market instep 1326. Steps 1324 and 1326 are used to ensure that a participant isnot obligated to purchase at a price above his bid or to sell at a pricebelow his offer. The volume clearing price fixed or determined accordingto the process illustrated in FIG. 7 is also known as a mid fixingprice, or, in the context of credit derivative trading, a tradablecredit spread fixing.

Embedded in the mid fixing methodology illustrated in FIG. 7 is a moretypical or preferred embodiment (1301) involving the process branch ofsteps 1302 through 1318, which essentially calculates the fixed pricefrom a plurality of bids and otters that cannot be paired up to createany tradable market. The absence of any tradable market may simply bethe result of dealer submission. That is, none of the bid pricesreceived in step 1306 crosses any of the offer prices received.Alternatively, the absence of any tradable market may be the result ofdiscarding or executing tradable markets in connection with step 1310.That is, the first sequence of bid prices may be compared with thesecond sequence of offer prices to identify tradable markets where a bidprice in the first sequence is equal to or greater than a correspondingoffer price in the second sequence. If any pair of bid and offer pricesis tradable, those two prices may be discarded or a trade may beexecuted matching that pair of bid and offer. This may continue untilthere is no longer any tradable markets (i.e., when the remaininghighest bid price in the first sequence is less than the remaininglowest offer in the second sequence). Then, according to one embodiment,the lowest half of the remaining (non-tradable) bids and the highesthalf of the remaining (non-tradable) offers may be discarded. In otherwords, only the highest half of the bids and the lowest half of theoffers are kept. Then, these remaining bid prices and offer prices areaveraged to obtain the mid fixing price level in step 1312.

As to tradable markets in the dealers' submissions, those bids andoffers may be paired up in at least two ways. For example, the bids andoffers may be paired up according to step 1314 described above, suchthat the highest bid and the lowest offer form a first tradable market,the next highest bid and the next lowest offer form a second tradablemarket, so on and so forth until a bid is no longer greater than orequal to a corresponding offer. Alternatively and more preferably, thesorted sequence of offer prices in the above paired-up tradable marketsmay be flipped and then paired with the sorted sequence of bid prices,such that the highest bid and the highest offer form a first tradablemarket, the next highest bid and the next highest offer form a secondtradable market, so on and so forth.

Additionally, bid fixing and offer fixing may be used in determining thefixed price. The basic bid fixing calculation is to lake the average ofall bids which remain after step 1310. The basic offer fixingcalculation is to take the average of all offers which remain alter step1310. The basic method as illustrated in FIG. 7 can be adjusted suchthat, if the bid fixing calculation exceeds the mid fixing the bidfixing is set to the initial mid fixing. Likewise, if the offer fixingcalculation is below the mid fixing, the offer fixing is set to the midfixing.

Other methods may also be used to calculate the bid fixing.

The trades capped method takes all bids remaining after step 1310 andsets all bids greater than the mid fixing calculated in step 1312 to themid fixing. After this, all bids are averaged to generate the bidfixing. Similarly, all offers remaining after step 1310 are taken andall offers less than the mid fixing calculated in step 1312 are set tothe mid fixing. After this, all offers are averaged to generate theoffer fixing.

The trades excluded method averages all bids remaining after step 1310that are less than the mid fixing to generate the bid fixing. If no bidsare below the mid fixing, the highest bid is taken as the bid fixing.Likewise, all offers remaining after step 1310 that are greater than themid fixing are averaged to generate the offer fixing. If no offers aregreater than the mid fixing, the lowest offer is taken as the offerfixing.

In the examples shown, the mid fixing is used as the fixed price for thevolume clearing. In addition, the bid fixing and offer fixing can beused as a reference in future contracts as well as incorporated into thecalculation of the mid fixing price in a current or future volumeclearing sessions.

FIG. 8 are two tables illustrating an exemplary method of determining avolume clearing price level as described above. In fable 1402, there areshown bids and offers contributed by eight participants. In Table 1404,the contributed bids and offers are separately sorted with highest bidsand lowest offers first, respectively. In accordance with step 1310,only the top half (i.e., four pairs) is kept. Thus, only rows 1410,1412, 1414, and 1416 are kept in the mid fixing calculation. Finally,rows 1410, 1412, and 1414 show bids that are greater than or equal tothe offers. Therefore, rows 1410, 1412, and 1414 represent a group oftradable markets. Row 1414 has the lowest bid and highest offer amongthis group, making row 1414 the last tradable market.

FIGS. 9A-9C are exemplary screen shots that a trader clientparticipating in volume clearing related activities might see on his orher user terminal. The user terminal may be part of or may be coupledlocally or remotely to an electronic trading system for creditderivatives.

FIG. 9A is an exemplary screen shot illustrating how a participant maybe solicited for bids and offers. In the depicted example, when thetrading system solicits bids and offers, a predetermined lime limit isimposed after which bids and offers are no longer accepted. The amountof time remaining to enter a bid or offer is shown in Field 1202. Incolumn 1204, the notional amount of a bid/offer for each creditderivative is shown. In this example, the volume (notional amount) isfixed for all participants, while in other embodiments this amount canbe entered by the participant. In column 1206, bid prices may be enteredby the participant for each credit derivative, and, in column 1208,offer prices may be entered. The system can also safeguard againstchoice prices (where a bid is equal to an offer) and inverted prices(where a bid is greater than an offer). Once the time limit forsubmitting orders has expired, all valid submissions by the participantsare collected by the system and a fixed price is determined based on thevalid submissions.

FIG. 9B is an exemplary screen shot illustrating how a participant mayperform volume clearing. Once again the amount of time remaining tochange or upsize orders is shown in Field 1202. Column 1210 shows afixed price (i.e., volume clearing price) for each of the creditderivatives. If the participant's bid price is greater than or equal tothe fixed price shown, the participant is required to buy at the fixedprice. In this case, the participant may further specify an additionalamount to buy at the fixed price by entering it into the appropriatefield of column 1212. If the participant's offer price is lower than thefixed price shown, the participant is required to sell at the fixedprice. In this case, the participant may further specify an additionalamount to sell at the fixed price, by entering it into the appropriatefield of column 1214. If the fixed price is between the participant'soffer price and bid price, the participant may elect to either sell orbuy an amount of credit derivative at the fixed price, but not both.Once the lime limit to upsize orders has expired, all additional ordersare processed by the system. The method of filling the orders is similarto that described in the volume clearing described above, except that apriority is assigned to those participants whose bids are closest to thefixed price.

FIG. 9C is a screen shot illustrating the results of a volume clearingsession. Columns 1216 and 1218 show the notional amount actually tradedas a result of the trading activities described above. In this example,since the participant's bid exceeded the fixed price, the participantwas obligated to buy 25 MM units of iTraxx Europe. As shown, theparticipant also requested to buy an additional 50 MM units andsuccessfully bought 75 MM units in total. The participant was notobligated to buy or sell iTraxx HiVol, but nevertheless requested to buy75 MM units. However, this order was not matched by any sell order.Since the participant's offer was lower than the fixed price for iTraxxCrossover, the participant was obligated to sell 10 MM units of iTraxxCrossover. The participant also requested to sell another 40 MM units ofiTraxx Crossover. Only a partial order of 20 MM units of iTraxxCrossover was available leading to a total of 30 MM units being actuallytraded.

Market Order Volume Clearing

According to some embodiments of the present invention, one way toincrease trade volumes of an electronic trading system may be to launchone or more volume clearing sessions for one or more credit derivativeproducts that have been most liquid during a preceding trading period.For example, at or towards the end of a trading day (or half a tradingday), a number of credit derivatives that have been most actively tradedor have seen the most trading interest may be selected for volumeclearing. An appropriate volume clearing price level may be determinedbased on trade information and/or bid/offer information associated witheach of the selected credit derivatives. Then, buy and sell orders maybe solicited during a predetermined time limit and then matched toexecute trades at the fixed volume clearing price level. When launchedat the end of a trading day, this process may be referred to as “marketorder volume clearing” (MOVC), or also known as “end-of-day volumeclearing.”

Embodiments of market order volume clearing may provide trader clients avaluable opportunity to catch up with the recent market activities, getexposure to the hottest credit derivative products, and fulfilladditional trading needs, all at a reasonably fixed price level andwithin a short period of time.

Many variations of the market order volume clearing process exist, forexample, in terms of timing of the process, selection of most liquidcredit derivatives, and determination of volume clearing prices,prioritization and matching of orders.

FIG. 10 is a flow chart illustrating an exemplary method for performingmarket order volume clearing in accordance with one embodiment of thepresent invention.

In step 202, an electronic trading system may select one or more creditderivatives that have been most liquid or actively traded during apredetermined time period. The predetermined time period may be, forexample, a trading day (market order volume clearing), a half tradingday (mid-day volume clearing), one or more trading hours (end-of-hourvolume clearing), or a preceding trading week (end-of-week volumeclearing). That is, although the exemplary method is sometimes referredto as “end-of-day” volume clearing, the timing of volume clearingsessions may be flexibly varied, for case of explanation, the followingdescription will take a trading day as the predetermined time period ofinterest.

The selection of the most liquid or actively traded credit derivativesmay be conducted according to one or more preset criteria. According toembodiments of the present invention, the trading system may pick adesired trading sector first before selecting the credit derivatives formarket order volume clearing purposes, for example, at the end of atrading day in London, it may be more preferable to pick Europeansectors for volume clearing. For a desired trading sector, the tradingsystem may calculate a few key indicators of trading activity or tradinginterest for each credit derivatives available in that sector.

According to one embodiment, the key indicators may include: (i) totaltraded notional amount; (ii) total number of trades; and (iii) totalnotional amount of orders received (orders not necessarily filled), allof which are calculated for the trading day that is about to end.Preferably, the three key indicators may be used in the order listedabove to evaluate and rank the amount of trading activity of or interestin a set of credit derivatives. For example, the credit derivatives in adesired sector may be first sorted in descending order of theirrespective total traded notional amount. If two credit derivates happento have the same traded notional amount, the second indicator—totalnumber of trades—will come in to break the tie. The one creditderivative with a greater number of trades is ranked ahead of the otherone. The third indicator—total notional amount of orders received—mayprovide a further tie-breaking criterion and can facilitate the pickingof credit derivatives on days when trading is thin or non-existent butthere has been active trading interest. According to an alternativeembodiment, the indicators (i) and (ii) may be combined to calculate asingle quantity, i.e., the average traded notional amount, for eachcredit.

The pool from which the most liquid credit derivatives are selected maycover not only those traded regularly online in the electronic tradingsystem but also those traded over the telephone (i.e. voice trades) andthose traded in previous volume clearing sessions. According to oneembodiment, all European corporate single-name CDS's may be included inthe pool, and top live of the single names may be selected for marketorder volume clearing.

In step 204, a volume clearing price level may be determined for eachselected credit derivative based on its trading and order informationduring the trading day. The price determination may follow two basicprinciples: (a) trade prices contain more information and therefore aremore relevant than bid/offer prices; and (b) the more recent the pricinginformation (e.g. trade, bid/offer) the more relevant it is to the pricedetermination.

According to some embodiments, for each selected credit derivative, theprice determination may be accomplished by through a decision tress thatexamines the following factors: an availability of a last bid, a lastoffer, or a last trade associated with the selected credit derivative; atiming relationship among the last bid, the last offer, and the lasttrade, if available; and price levels of the last bid, the last offer,and the last trade, if available.

FIG. 11 shows an exemplary decision tree for determining a volumeclearing price level for a market order volume clearing session inaccordance with one embodiment of the present invention. The exemplarydecisioning process may start in step 1101. In step 1103, it may bedetermined whether there are both a last bid and a last offer. In thiscontext, a last bid may be a most recent buy order during the tradingday that was not tilled, and a last offer may be a most recent sellorder during the trading day that was not filled. A last trade is a mostrecent trade transaction that has been completed or agreed on during thetrading day.

If there are both a last bid and a last offer, the process branches tostep 1105. Otherwise, it may be determined in step 1107 whether there iseither a last bid or a last offer. If neither a last bid nor a lasttrade exists, there must have been a last trade of this creditderivative due to the fact that it has been selected as one of the mostliquid (i.e. most actively traded or of most interest to traders) duringthe trading day. Then, in step 1109, the volume clearing price level maybe fixed at the price level of the last trade.

If it is determined in step 1107 that either a last bid or a last offerexists, it may then be determined in step 1111 whether there is a lasttrade. If not, the volume clearing price level will be fixed based on adetermination in step 1113 as to whether there is a last bid. If thereis a last bid, then, in step 1115, the volume clearing price level isfixed at the price level of the last bid. If there is a last offerinstead, then, in step 1117, the volume clearing price level is fixed atthe price level of the last offer.

If it is determined in step 1111 that a last trade exists, it may thenbe determined in step 1119 whether there is a last bid. If so, then instep 1121 it is determined whether the last bid is later in time thanthe last trade. If the last trade is later, then the volume clearingprice level may be fixed at the price level of the last trade in step1125. If the last bid is later than the last trade, then the pricelevels of the last bid and the last trade are compared in step 1127. Ifthe last traded price is higher than the price level of the last bid,then the volume clearing price level may be again fixed at the pricelevel of the last trade in step 1125. If the price level of the last bidis higher than the last traded price, then the volume clearing pricelevel may be fixed at the price level of the last bid in step 1131.

If it is determined in step 1119 that there is not a last bid but a lastoffer, it may be determined in step 1123 whether that last offer islater in time than the last trade. If the last trade is later, then thevolume clearing price level may be fixed at the price level of the lasttrade in step 1125. If the last offer is later than the last trade, thenthe price levels of the last offer and the last trade are compared instep 1129. If the last traded price is lower than the price level of thelast offer, then the volume clearing price level may be again fixed atthe price level of the last trade in step 1125. If the price level ofthe last offer is lower than the last traded price, then the volumeclearing price level may be fixed at the price level of the last offerin step 1133.

Referring back to the top of the decision tree in step 1103, if it isdetermined that there are both a last bid and a last offer, it may thenbe determined in step 1105 whether there is a last trade. If not, thevolume clearing price level may be calculated in step 1135 according toa method described herein below in connection with FIG. 12. If a lasttrade does exist, it may be determined in step 1137 whether the lasttrade is later than both the last bid and the last offer. If so, thevolume clearing price level may be fixed at the price level of the lasttrade in step 1139. If not, it may be determined in step 1141 whetherthe last trade precedes both the last bid and the last offer. If so, thevolume clearing price level may again be calculated in step 1135according to a method described herein below.

If the last trade falls between the last bid and the last offer in termsof timing, then it may be determined in step 1143 whether the last bidis later in time than the last trade. If the last bid is later in limethen the last trade, then the price levels of the last bid and the lasttrade are compared in step 1145. If the last traded price is higher thanthe price level of the last bid, then the volume clearing price levelmay be fixed at the price level of the last trade in step 1151. If theprice level of the last bid is higher than the last traded price, thenthe volume clearing price level may be fixed at the price level of thelast bid in step 1149.

If the last trade is later in time then the last bid, (i.e., the lastoffer is later than the last trade), then the price levels of the lastoffer and the last trade are compared in step 1147. If the last tradedprice is lower than the price level of the last offer, then the volumeclearing price level may again be fixed at the price level of the lasttrade in step 1151. If the price level of the last offer is lower thanthe last traded price, then the volume clearing price level may be fixedat the price level of the last offer in step 1153.

The aforementioned method for calculating the volume clearing pricelevel in step 1135 is illustrated with another exemplary decision treeshown in FIG. 12. The method may start in step 1201. In step 1203, aspread may be calculated as the difference between the last offer andthe last bid. In step 1205, it may be determined whether the spread isless than zero. If so, that means the last bid price is higher the lastoffer price and it may be determined in step 1207 whether the last bidis later in time than the last offer. If the last bid is later, then thevolume clearing price level may be fixed at the price level of the lastbid in step 1209. If the last offer is later, then the volume clearingprice level may be fixed at the price level of the last offer in step1211.

If it is determined in step 1205 that the spread is greater than orequal to zero, then an initial mid may be calculated, in step 1213, asthe mean of the last bid price and the last offer price. Then, in step1215, it may be determined whether the spread contains an odd number ofprice increments. If not, then in step 1217, the volume clearing pricelevel may be fixed at the initial mid calculated in step 1213. If thespread docs contain an odd number of price increments, the volumeclearing price level may depend on a determination in step 1219 as towhether the last bid is later in time than the last offer. If the lastbid is later, the volume clearing price level may be fixed at theinitial mid minus half a tick in step 1221. If the last offer is later,the volume clearing price level may be fixed at the initial mid plushalf a tick in step 1223.

Referring back to FIG. 10, once a volume clearing price level has beendetermined for each selected credit derivative, then, in step 206,trading clients may be invited to submit orders for the selected creditderivatives within a time limit. Each buy or sell order may indicate adesired notional amount to be traded at the volume clearing price levelthat has been fixed in step 204. The submission of orders may beanonymous yet binding, as described above. That is, each participantonly sees his or her own proposed orders but not those submitted byothers. If an order is validated and accepted by the trading system, theorder may be automatically executed without any further confirmationfrom the participant who submits the order, and the participant will bebound by the executed order.

In step 208, upon expiration of the time limit for order submission, thetrading system may automatically match buy orders with sell orders. Theorder matching may be conducted according to one or more business rulesor criteria. For example, the participants and/or their orders may beprioritized first, and the prioritization may be one factor in pairingup the orders. Additionally or alternatively, the orders may also bematched to maximize a total executable national amount and/or tominimize a total number of trading tickets to be issued.

In step 210, the trades may be completed at the volume clearing pricelevel that has been fixed in step 204 and according to the matchedorders.

FIG. 11A shows a table listing exemplary price scenarios and theresultant volume clearing price levels in accordance with one embodimentof the present invention. FIG. 11A may be viewed in connection withFIGS. 11 and 12. It should be noted that some of the price scenariosshown FIG. 11A may be unlikely to occur.

FIG. 11B shows a table presenting exemplary trading data related to realmarket order volume clearing sessions. In this example, only top twocredit derivatives are shown for each European non-sovereign sector. Inaddition, as one timing variation, the search of the most liquid creditderivatives is focused on trades or orders created in the trading systemafter mid-day, making the volume clearing session effectively a half-dayvolume clearing.

FIG. 13 is a screen shot showing an exemplary control window throughwhich market order volume clearing may be configured and controlled inan electronic trading system. The control window shows various fieldswhere market order volume clearing parameters may be changed. Forexample, the market order volume clear function may be enabled byclicking a checkbox 1303. A launch time for the market order volumeclearing session may be set in Field 1301. A lime for publishing thename selection of the most liquid credit derivatives (e.g., Top 5) maybe specified in Field 1305. There may also be provided a list of thehighest ranked credit derivatives and checkboxes 1307 for including orexcluding each credit derivative from the market order volume clearing.The “Level” column shows volume clearing price levels that have beenautomatically fixed by the trading system according to the methodsdescribed above.

FIG. 14 is a screen shot showing an exemplary display of Top-5 singlenames in accordance with one embodiment of the present invention. At apredetermined publish time as shown in FIG. 13 (1305), all creditderivates (e.g. Top 5) that have been selected for market order volumeclearing may be published in a window such as a “Top Single Names” (or“Top S/Ns”) window shown in FIG. 14. The lop S/Ns window may list thefive highest ranked credit derivative products, their respective terms,and information of the last trades. The information of the last tradesmay be periodically updated and may include a last traded price, a lasttraded notional amount, and an indication of whether the traded pricewas hit or lifted. Serving as an advance notice or invitation, the TopS/Ns window may be displayed and updated until a predetermined time forlaunching the market order volume clearing session.

FIG. 15 is a screen shot showing an exemplary volume clearing window atrade client may sec during a market order volume clearing session inaccordance with one embodiment of the present invention. This window maybe automatically displayed by the trading system or manually opened by atrader client upon some visual and/or audio alert. All the selectedcredit derivatives may be shown in the volume clearing window at thesame lime and one or more licking clocks may count down the timeremaining for entering orders. A flashing or static “EOD” icon next to aticker may indicate that this is a market order volume clearing asdifferentiated from other types of volume clearing sessions. The volumeclearing price levels are displayed. Each invited participant may enterBuy and/or Sell notional amount for each credit derivative. There mayalso be provided an option for a participant to re-post an order if itdoes not gel filled at the first attempt. That is, the market ordervolume clearing may be repeated if a first session does not causesufficient volume to be traded or if significant trading interest (orunfilled orders) remains. In that case, a participant may simply allowthe trading system to re-submit the previously unfilled orders.

Although the foregoing describes market order volume clearing as beingpreferably an integral part of the functionality of an electronictrading system, the market order volume clearing function may also beimplemented as an add-on module. Such an add-on module may beselectively installed only for trading clients who are likely toparticipate in market order volume clearing sessions. In addition, themarket order volume clearing methodology for trading credit derivativesmay be easily adapted for trading of credit indices, single-name CDSproducts, tranches, options, as well as other types of financialinstruments, as may be appreciated by those with ordinary in the art.

Limit Order Volume Clearing

The above-described market order volume clearing process helps increasetrade volumes of the most liquid credit derivative products. There isalso a need to increase trade opportunities for illiquid creditderivatives, such as single-name credit default swap (CDS) products, forpractical reasons, it may not be desirable to perform volume clearingconsistently on a fixed set of single-name CDS products. In addition,there is a greater potential for publicized trades to influencesingle-name CDS market as compared to credit indices. Based on theseconsiderations, some embodiments of the present invention provide for aunique auction process for a variable set of illiquid credit derivativeproducts, which process is referred to as “limit order volume clearing”(LOVC), or also known as “blind volume clearing.”

FIG. 16 is a flow chart illustrating an exemplary method of limit ordervolume clearing in accordance with one embodiment of the presentinvention.

In step 1602, the most illiquid credit derivative products of a tradingday (or other predetermined time period) may be selected. The liquidity(or illiquidity) of a credit derivative may be evaluated based on dealerinterest in and market activities involving that credit derivative. Theevaluation is typically done for a preceding trading period such as atrading day that is about to end, the previous few trading days, or atrading week. According to one embodiment, brokers may be allowed topick a number of single name CDS products as the subject of limit ordervolume clearing for a particular day. The brokers' selections may bebased on information from their clients and/or their knowledge of thecredit market.

In step 1604, trading clients may be invited to submit their orders forthe selected credit derivatives within a time limit. The ordersubmission interface may be a window that looks somewhat similar to thefixing contribution window shown in FIG. 9A. Each invited participantmay enter his or her buy or sell orders by indicating a bid/offer priceand a desired notional amount for one or more of the credit derivativesselected in step 1602. A currency column may be provided for productscapable of trading in multiple currencies. According to some embodimentsof the present invention, a visual or audio alert may be employed toindicate concurrent trading interest in a credit derivative. Forexample, the line or cell corresponding to a particular creditderivative may be highlighted or flashing to indicate that someone elsehas placed an order on that credit derivative. However, there is nofurther detail disclosed as to the size or price of the other order. Itis believed that the indication of other traders' interest in a creditderivative may be sufficient to pique the interest of a trader receivingsuch an alert. However, anonymity may be preferred until trades havebeen completed to prevent undue influence on the market.

In one embodiment of the present invention, trader clients may beallowed to specify only a desired volume to trade without providing abid or offer price. Such an order may be referred to as a market order.The market order may be then placed in the order book and theparticipant agrees to trade the desired volume at what ever auctionprice is fixed in the price determination phase.

In step 1606, an auction price may be determined based on the submittedorders to maximize a total executable notional amount. All buy and sellorders submitted before the time limit expires may be considered.

According to some embodiments of the present invention, the pricedetermination in step 1606 may follow an exemplary decision tree asshown in FIG. 17. The decisioning process may be started by searchingfor price level(s) with the largest executable notional amount andsmallest surplus in step 1702. The buy orders may be sorted in ascendingorder of bid price and the sell orders may be sorted in descending orderof offer price. Order submission time may be further used astie-breakers, such that orders with equal prices will be sorted with theearlier submitted order receiving a higher rank. Then, the sorted buyorders and sell orders may be line up to calculate the total executablenotional amount at each price level. As a result, one or more pricelevels with the largest executable notional amount may be found.

Then, in step 1704, it may be determined as to how many price levelshave the (same) maximum executable notional amount.

If there is exactly one price level that has the maximum executablenotional amount but the smallest surplus, the auction price may be fixedat that price level in step 1710. A surplus refers to the total notionalamount of unfilled orders. An exemplary set of order submissions,auction results, and order book data for this scenario is shown in FIG.20 as Example 1.

If multiple price levels exist with the maximum executable notionalamount, then it may be determined in step 1706 what type of surplus isproduced at each of the multiple price levels. When a surplus occurs onthe bid side, the surplus is referred to as a demand surplus. When asurplus occurs on the offer side, the surplus is referred to as a supplysurplus.

If it is determined in step 1706 that only demand surplus exists for themultiple price levels, the auction price may be fixed at the highesttradable level in step 1712. An exemplary set of order submissions,auction results, and order book data for this scenario is shown in FIG.21 as Example 2.

If it is determined in step 1706 that only supply surplus exists for themultiple price levels, the auction price may be fixed at the lowesttradable level in step 1714. An exemplary set of order submissions,auction results, and order book data for this scenario is shown in FIG.22 as Example 3.

If it is determined in step 1706 that the surplus is split between buyand sell sides or there is no surplus at any of the price levels withmaximum tradable volume, then the auction price may be fixed at theaverage of all the price levels in step 1716. An exemplary set of ordersubmissions, auction results, and order book data for this scenario isshown in FIG. 23 as Example 4.

Referring back to step 1704 in FIG. 17, if it is determined that none ofthe buy and sell orders touch or cross, then there is no price level atwhich trades can be executed. In that case, it may be determined in step1708 whether there are both buy and sell orders in the order book. Ifboth buy and sell orders exist, then no auction price is set but avolume clearing price may be set, in step 1718, at the average of thebest bid price and the best offer price. A volume clearing session maythen be launched at that averaged price level. An exemplary set of ordersubmissions, auction results, and order book data for this scenario isshown in FIG. 24 as Example 5.

If it is determined at step 1708 that either buy or sell orders do notexist, then, in step 1720, no auction price will be set and no volumeclearing session will be launched. An exemplary set of ordersubmissions, auction results, and order book data for this scenario isshown in FIG. 25 as Example 6.

For a further illustration of how to determine the auction price, anumerical example involving six banks (Bank 1, Bank 2, . . . Bank 6) isshown in FIGS. 26A-C.

FIG. 26A shows order submitted by Banks 1-6 respectively, each orderbeing either a bid or an offer and each including a notional amount(“Size” in millions) and a price (“Price” in bps). From this simplifiedexample, it may be noted that there are three tradable price levels orlimits, 40, 60 and 64.

FIG. 26B shows a view of the order book listing both the limitssubmitted by the banks and the resulting surpluses at each limit. Thelimits are listed in a descending order starting from 67 and down to 30.At 67 bps, the limit submitted by Bank 4, there is no tradable notionalamount, the demand surplus is zero, and the supply surplus is 150 MM.Therefore, the total surplus is the sum of the demand surplus and thesupply surplus, 150 MM. Similarly, at 64 bps, there is 50 MM tradable,the demand surplus is zero, and the total surplus is 50 MM. At 60 bps,there is 50 MM tradable, and the total surplus is 50 MM. At 40 bps,there is 50 MM tradable, and the total surplus is 50 MM. At 30 bps,there is no tradable notional amount, and the total surplus is 125 MM.

Based on the order book shown in FIG. 26B, the auction price may befixed (in FIG. 26C) at 60 bps by maximizing total tradable notionalamount and minimizing total surplus. In this particular example, thereare three price levels—40, 60 and 64 bps—that lead to the same tradablenotional amount, 50 MM. If these three levels caused the same amount oftotal surplus, then, according to some embodiments, the median pricelevel (i.e., 60 bps here) or an average of the three would be chosen asthe auction price level, unless a last traded price exists. If a lasttraded price exists, a price level closest to the last traded price maybe chosen from the three equally viable prices in order to minimizevolatility.

Referring back to FIG. 16, once an auction price has been determined instep 1606, a first subset of the submitted orders may be executed at thefixed auction price. The first subset of orders are those executable atthe auction price and may be matched to minimize the total number oftrade tickets issued. Trades may be executed at the auction pricebetween counterparties with bid and offer prices equal to or better thanthe auction price. According to one embodiment of the present invention,the orders may be tilled in the order of best to worst price. That is,buy orders with the best bid price are matched with sell order with thebest offer price, and so on. Where there is more than a single order ata particular price level on either the buy or sell side, the time thatthe orders are submitted may be used to break a tie, with an earliersubmitted order taking precedence. At the end of step 1608, a maximumamount of orders will have been traded based on the submitted orders.

In an actual real-time electronic trading system, steps 1606 and 1608(i.e. price determination and auction execution phases) will take verylittle time to complete. Then, in step 1610, a volume clearing sessionmay be launched at the determined auction price to fill a second set oforders. The second set of orders may include a second subset of orderssubmitted in step 1604 (the order submission phase) but remain unfilledat the end of step 1608. The second set of orders may further includeadditional orders solicited from invited participants during anotherlimited time period.

FIG. 18 is a screen shot showing an exemplary volume clearing window atrade client may see during the order submission phase of a limit ordervolume clearing session. As shown, the trade client has submitted a buyorder for 5-year-term SKM (due in November 2012) at a bid price of 28bps with a desired notional of 5 MM.

FIG. 19 is a screen shot showing an exemplary volume clearing window atrade client may see during the volume clearing phase of a limit ordervolume clearing session. As shown, the trade client has placed a buyorder for 10 MM of 5-year-term SKM at 29 bps as well as a sell order of5 MM of 5-year-term KTGC at 35 bps.

While the foregoing description includes many details and specificities,it is to be understood that these have been included for purposes ofexplanation only, and are not to be interpreted as limitations of thepresent invention. It will be apparent to those skilled in the art thatother modifications to the embodiments described above can be madewithout departing from the spirit and scope of the invention.Accordingly, such modifications are considered within the scope of theinvention as intended to be encompassed by the following claims andtheir legal equivalents.

1. An online trading system, comprising: a database configured to storeinformation for certain reference entities; memory configured to storeexecution instructions; and a processor coupled with the database andthe memory, the processor configured to execute the instructions, theinstructions configured to cause the system to: receive from each of aplurality of trader clients a position for a financial instrumentassociated with a reference entity, the position having either a buy orsell position and a price and a notional; receive an acceptance from atransacting trader client to the position for the financial instrumentof one of the plurality of trader clients; invite a selected pluralityof trader clients, based on predefined criteria, to transact at theprice of the accepted position; receive a position for the financialinstrument from a number of the selected trader clients in response tosaid invitation; match the received positions of the plurality ofselected trader clients to each other based on the notional of eachposition; and finalize the transactions of all positions which arematched at the plice of the accepted position.
 2. The system of claim 1,wherein the instructions are further configured to cause the system tooffer each of the plurality of trader clients a new notional for tradingat a specific price, and receive a confirmation from one of theplurality of trader clients.
 3. The system of claim 1, wherein theinstructions are further configured to cause the system to invite theplurality of selected trader clients based on knowledge of prior traderclient behavior with respect to the financial instrument.
 4. The systemof claim 1, wherein the system is caused to match the positions of theplurality of trader clients by assigning to each trader client apriority and by matching the highest priority trader client with acounterparty with a notional equal to the position of the highestpriority trader client.
 5. The system of claim 1, wherein the system iscaused to match the positions of the plurality of trader clients byfurther matching each of the plurality of trader clients with acounterparty based on the priority and the notional.
 6. A computerimplemented method for online trading of financial instruments,comprising: receiving, via a computing device comprising a processorexecuting program instructions, from each of a plurality of traderclients a position for a financial instrument associated with areference entity, the position having either a buy or sell position anda price and a notional; receiving via the computing device an acceptancefrom a transacting trader client to the position for the financialinstrument of one of the plurality of trader clients; inviting via thecomputing device a selected plurality of trader clients, based onpredefined criteria, to transact at the price of the accepted position;receiving via the computing device a position for the financialinstrument from a number of the selected trader clients in response tosaid invitation; matching via the computing device the receivedpositions of the plurality of selected trader clients to each otherbased on the notional of each position; and finalizing via the computingdevice the transactions of all positions which are matched at the priceof the accepted position.
 7. The computer implemented method of claim 6,further comprising: offering each of the plurality of trader clients anew notional for trading at a specific price; and receiving aconfirmation from one of the plurality of trader clients.
 8. Thecomputer implemented method of claim 6, further comprising: offeringeach of the plurality of trader clients a change in the notional of theposition and receiving a new notional request from one of the pluralityof trader clients.
 9. The computer implemented method of claim 6,further comprising: selecting a plurality of invited trader clients toparticipate in the transaction at the price of the accepted positionbased on knowledge of prior trader client behavior with respect to thefinancial instrument.
 10. The computer implemented method of claim 6,wherein the matching the positions of the plurality of trader clientscomprises: assigning to each trader client a priority; and matching thehighest priority trader client with a counterparty with a notional equalto the position of the highest priority trader client.
 11. The computerimplemented method of claim 10, wherein the matching the positions ofthe plurality of trader clients further comprises matching each of theplurality of trader clients with a counterparty based on the priorityand the notional.